Vermont Captive Law Changes Include Parametric Risk Transfer Contracts

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June 01, 2022 |

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Vermont Governor Phil Scott has signed legislation modernizing Vermont's captive insurance statute and removing inconsistencies.

Among the updates to Vermont's captive insurance law included in this year's bill, H.515, are the ability for captive insurance companies to enter into parametric risk transfer contracts, simplified reporting requirements, improved solvency procedures for sponsored cell captives, and a clarification of an inconsistency related to the treatment of affiliated business in sponsored cell companies.

"Vermont is always looking to improve its laws to better meet the needs of captive insurance companies, while improving the quality of our regulation," the governor said in a statement. "This year is a great example of that."

The provision specifically allowing Vermont-domiciled captive insurance companies to enter into parametric risk transfer contracts enables those captives to use a mechanism that is becoming increasingly commonplace among organizations seeking protection for catastrophic events.

The statement from the Vermont Agency of Commerce and Community Development noted that parametric contracts pay a set sum upon the occurrence of certain quantifiable events, such as a hurricane of a specific category hitting a designated area, regardless of whether the contract holder incurs a loss. An insurance contract, meanwhile, will pay an amount upon the occurrence of the same or similar events, but the insurance policy holder must incur and prove a loss, and the amount paid is subject to an adjustment.

"Although purely parametric contracts are not considered insurance due in large part to that distinction, the contract is a useful risk management tool," Deputy Commissioner David Provost, head of the Captive Insurance Division in the Vermont Department of Financial Regulation, said in the statement. "And there are safe harbor features that can be built into the contract to qualify it as insurance. Organizations often use captives as a central repository for all types of risk management tools, not just insurance, so it will be helpful for companies to have explicit authority for their captive to enter into parametric contracts."

"Vermont continues to take industry ideas and really consider those ideas," Kevin Mead, president of the Vermont Captive Insurance Association, said in the statement. "I'm glad that we could work together to make it easier for captive companies to utilize another risk management tool."

"Parametric risk transfer is the solution for systemic and emerging risks. The symbiosis of capital markets and index-blockchain-based solution is a great step into the future, and Vermont lives up to its pioneering role in the captive industry," Marcus Schmalbach, founder and CEO of RYSKEX Inc., said in the statement. "Parametric risk transfer finds its home in the gold standard captive domicile of Vermont."

Other changes to Vermont's captive law included in this year's legislation included measures simplifying reporting requirements, improving delinquency procedures, and ensuring consistency in language for the treatment of affiliated business in cells and consolidations.

"These smaller changes, when added up year after year, make all the difference for captive insurance companies," Brittany Nevins, Vermont's captive insurance economic development director, said in the statement. "Vermont continues to be proactive and ask, 'What can we do to be better?' This is central to our industry culture in our state."

June 01, 2022